Gold-Plated Garbage is Still Garbage: The Fund Managers' Tax Break

While tens of millions of ordinary workers pay taxes at a 25 percent marginal rate, many of Wall Street's highest paid dealmakers get to pay tax at just a 15 percent rate. They get this lower rate because of the special treatment of "carried interest," also known as the fund managers' tax break.

The Washington Post has a piece about how the populists of the left and right can't seem to get the Senate to take away this special break for many of the richest of the rich. While the Post piece is useful in calling attention to the absurdity, that at this time of intense populist anger, this huge handout to the rich continues unchallenged, it implies that there is some rationale for the tax break.

The basic logic of "carried interest" is extremely. Most fund managers get much of their pay on commission. In addition to getting a flat percentage of the funds being managed (typically 1-2 percent annually), they usually get paid a share of the fund's earnings, typically 15-20 percent. This latter payment is the "carried interest." As a result of the fund managers' tax break, this carried interest is taxed at the 15 percent capital gains tax rate rather than being treated as normal wage income.

The Post errs by presenting the utter nonsense given by the tax break's defenders without challenge. There is no logical distinction between carried interest and the commission payments that a shoe salesman or a realtor receives. This commission payments are taxed as normal wage income. There is no reason, other than the power of Wall Street lobbyists, to treat the commissions of fund managers differently. The Post should have included someone who made this point.

[Addendum: David Cay Johnston reminds me that the tax rate for fund managers can be zero. As long as they leave their earnings invested in their fund, they pay zero tax on it, just as if it were capital gains on stock that they still held. They will only pay the tax if they decide to sell the share of the fund purchased with their earnings.]